NCLAT Delhi: Loan Recall Notice Date Shall Not Constitute Relevant Date Of Default Under IBC, Partial Payments Cannot Absolve CD From Default Status

Background Facts:

State Bank of India (“SBI”), the Respondent, being the financial creditor initiated a Corporate Insolvency Resolution Process (“CIRP”) under Section 7 of Insolvency and Bankruptcy Code, 2016 (“IBC”) against Jabalpur MSW Pvt. Ltd. (Corporate Debtor) for default of Rs. 46.8 crores with the date of default as 27.09.2019 when the loan was classified as NPA and recall notice issued on 11.08.2020.

NCLT New Delhi admitted the CIRP petition via Order dated 14.09.2023. Mr. Milind Kashiram Jadhav (Appellant), the Suspended Director of the Corporate Debtor, has challenged the said Order through the appeal before NCLAT.

Contentions of the Appellants:

The Appellant argued that the default date should be the date of the Loan Recall Notice, which is 11.08.2020, as payments had been made between the NPA declaration date and the Recall Notice. Additionally, SBI should have issued a cure period notice before the Loan Recall Notice, as required by the loan agreement. In such a scenario, the default would have shifted from 25.03.2020 to 24.03.2021, and the proceedings would have been prohibited under Section 10A of IBC.

Contentions of the Respondent:

SBI contended that the default date is the date of NPA declaration, which is 27.09.2019, as the loan had been unpaid for over 90 days before that. The Loan Recall Notice serves as an extra chance to make payment, rather than being crucial for defining the default.

NCLAT Verdict:

The NCLAT Delhi dismissed the appeal and held that part payments between the NPA classification date and loan recall notice date cannot mean that the loan recall notice shall constitute the relevant date of default under the IBC. Further, partial payments on the part of the Corporate Debtor cannot absolve it from default status.

The Appellate Tribunal relied upon Suzlon Synthetics Ltd. v. Stressed Asset Stabilization Fund and observed that there is no requirement to calculate and fix the exact amount of repayment.

It noted that as per Section 3(12) of the IBC, the term 'Default' refers to the failure to pay debt when any part of the amount becomes due and payable. Therefore, when a loan account is classified as an NPA, the entire debt becomes due and payable, constituting a default under the IBC. Thus, the date of the NPA declaration can be considered as the date of default. Presently, the default was occurring even before the declaration of NPA status, before the 90-day threshold.

NCLAT noted that upon default by the CD and classification of accounts as NPA, the Bank's statutory rights to a legal recourse became available. Therefore, the bank had the legal recourse to opt for resolution under the IBC which is a specialized law governing the resolution of distressed entities.

Further, NCLAT disregarded the contentions of the Appellant to consider the recall date as the date of default. It held that the date of NPA declaration by the NCLT i.e. 27.09.2019 of the recall date i.e. 18.08.2020 is to be considered as the relevant date and is supported by the judicial precedents and the present facts.

It also observed that since the recall date being 11.08.2020 cannot be considered as the relevant date of default, the Appellant is not protected by the period under Section 10A of the IBC.

NCLAT disregarded the Appellant's argument regarding payments made after the NPA declaration. NCLAT held that despite such payments, the loan accounts remained in the NPA category without being regularized, indicating a persistent default status. Therefore, the existence of partial payments doesn't excuse the Corporate Debtor from the default.

In conclusion, NCLAT upheld NCLT New Delhi's observing that absence of concerted efforts to address the default and the continual classification as NPAs firmly establish the ongoing default. Thus, SBI is justified in pursuing its claims based on the sustained default status of the loan accounts.

Case Title: Milind Kashiram Jadhav vs State Bank of India

Case No.: Comp. App. (AT) (Ins) No. 1589 of 2023

Counsel for Appellant: Ms. Ritwika Nanda, Advocate

Counsel for Respondent: Mr. Siddharth Sangal and Mr. Chirag Sharma,

Advocates for R-1/SBI, Mr. Vinod Chaurasia and Mr. Sajjan Kumar Dokania, Advocates for RP

Click here to Read/Download Order